Here's What Mark Zuckerberg Could Learn From Warren Buffett

Adnan Abidi/Reuters
Warren Buffett is full of wisdom and Mark Zuckerberg of Facebook would do well to listen to Buffett advice from nearly two decades ago.

The wise words

When discussing new investments made by Berkshire Hathaway in his 1996 letter to shareholders, Buffett spoke to how he and longtime lieutenant Charlie Munger sought businesses described as "The Inevitables," such as Coca-Cola and Gillette, which have an entrenched competitive advantage allowing them to "dominate their fields worldwide for an investment lifetime."

He provided a point of clarification, noting that "you can, of course, pay too much for even the best of businesses," reminding investors even the best companies make for bad investments if the price paid relative to its value is too high.

But he noted there was "a far more serious problem," than overpaying for a company, and one has to wonder if Facebook offers a prime example. Buffett said: "A far more serious problem occurs when the management of a great company gets sidetracked and neglects its wonderful base business while purchasing other businesses that are so-so or worse. When that happens, the suffering of investors is often prolonged."

Neglecting a wonderful business?

While Facebook hasn't neglected its wonderful base business entirely, investors are still scratching their heads about what appears to be a mind-numbingly dumb acquisition of messaging service WhatsApp by Facebook for $19 billion in February.

As fellow Fool Evan Niu, a senior technology specialist for Fool.com, noted in an October article describing the acquisition: "Last year, WhatsApp generated $10.2 million in revenue and a whopping $138 million loss. For the first half of 2014, it had $15.3 million in sales and an astounding $232.5 million net loss.

The figures also imply a trailing-12-month revenue base of $22.7 million. That means Facebook paid 960 times sales for WhatsApp (and you thought Facebook itself was expensive at 21 times sales)."

Warren BuffettAP / Seth Wenig
Evan also reminded us that since the deal was structured in such a way that just $4 billion was paid in cash and the the remainder in Facebook shares and restricted stock units, the purchase price has actually ballooned to nearly $22 billion. Meaning Facebook has paid $22 billion for a business that has lost it $232 million in six months.

With that in mind, it would be difficult to suggest WhatsApp as anything but an acquisition that was "so-so or worse," and one has to think the capital could've been deployed in a better way.

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Facebook was ranked dead-last with LinkedIn in user satisfaction among social media companies, according to the latest American Customer Satisfaction Index survey. Facebook could have used the resources put toward WhatsApp to significantly improve user experience.

Also consider Twitter is currently valued at $23 billion, meaning for just $1 billion more, Facebook could've created the biggest social media magnate the world had ever seen. Of course, this is likely a pipe dream considering Twitter turned down acquisition efforts by Zuckerberg twice in its early years, but it does reveal the magnitude of the cost of WhatsApp.

Again, it bears repeating: Facebook has now paid $22 billion for a business with $23 million in sales over the last 12 months.

A final thought

Buffett concluded his 1996 remarks by noting that two of "The Inevitables" made mistakes in years prior as Coke was "growing shrimp" and Gillette was "exploring for oil" and:

"Loss of focus is what most worries Charlie and me when we contemplate investing in businesses that in general look outstanding. All too often, we've seen value stagnate in the presence of hubris or of boredom that caused the attention of managers to wander. That's not going to happen again at Coke and Gillette, however -- not given their current and prospective managements."

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While the WhatsApp acquisition wasn't exactly akin to Coke's growing shrimp, one has to wonder if Facebook's loss of focus is drifting too far.